The government may be overestimating the structural fiscal surplus September 15, 2014

Calculations by the Fiscal Council show a serious risk that the structural budget position for 2014–2015 has been overestimated. For this reason the Fiscal Council recommends that the government draft its budget for 2015 so that the structural surplus in the general government budget is not less than the 0.8% of GDP noted in the summer forecast.

The Fiscal Council finds that this solution will increase confidence that the general government budget for 2015 will meet the requirement in the State Budget Act for it to be in balance or surplus at the end of the year.

The Fiscal Council finds that the summer macroeconomic and fiscal forecasts of the Ministry of Finance are a suitable base in terms of both economic growth and tax revenues to be used for preparing the the draft state budget for next year.

The summer fiscal forecast is not sufficiently detailed on spending during the forecast horizon and does not give a comprehensive picture of the development of the fiscal position. This makes it hard to assess the requirement in the State Budget Act for the budget to be in balance.

Statistics Estonia corrected the time series for GDP after the Ministry of Finance forecast was completed, and this has an effect on the assessment of the structural fiscal position. However, the change in the view of real GDP growth in the past does not affect the forecast for revenues in the state budget.

It is wise to use several alternative methods in assessing the structural fiscal position. This will help mitigate the measurement risk that arises because the method used by the Ministry of Finance does not consider the changes of the past few years in the structure of Estonian GDP that have supported the collection of tax revenues.

The Fiscal Council held its regular meeting to discuss the summer forecast of the Ministry of Finance last Thursday in Tartu. The Fiscal Council opinion on the forecast and a more thorough explanatory note can be found here:

Fiscal Council opinion on the summer forecast 2014 of the Ministry of Finance (.pdf)

Additional information:
Raul Eamets
Chairman of Fiscal Council
Tel: +372 514 0082

Background Information

The Fiscal Council is an independent advisory body set up under the State Budget Act 2014 to assess the macroeconomic and fiscal forecasts that serve as a base for Estonian fiscal policy and to observe whether the national budgetary rules are followed.